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The Senior Managers & Certification Regime – a major change to the way the FCA will regulate you

This article is intended for clients of Consumer Credit Solutions.  This article is for guidance only, and it is strongly recommended that you review the FCA’s website and take independent advice where necessary.

 

What is the Senior Managers & Certification Regime (SM&CR)?

The Senior Managers & Certification Regime (SM&CR) is a complete overhaul of the way in which the FCA regulates businesses like yours, and it represents the biggest change they have made to their rules since they became the industry regulator in April 2014.

You will need to ensure that you are fully aware of the upcoming changes and have made the necessary enhancements to your business practices in order to be compliant with the new FCA rules.

Currently you are subject to the Approved Persons Regime (APR), under which your company directors and executives will have applied to the FCA for permission to hold ‘controlled functions’.  The SM&CR will replace the Approved Persons Regime.

The SM&CR is designed to make key individuals (in addition to directors and executives) within your business more accountable for their actions and to encourage them to take responsibility for their actions – improving conduct at all levels of business.

The SM&CR has already been implemented within the banking industry, and the FCA is now rolling it out to all other businesses they regulate.

 

When will the new rules apply to you?

THE SM&CR will apply to your business from 9th December 2019.

By this date you will need to ensure that all of your staff holding the newly created ‘Senior Manager Functions’ are fully aware of their responsibilities and are capable of fulfilling them.  You will then have another 12 months (9th December 2020) to train all other staff accordingly.

We strongly recommend that you start planning for the implementation of the new rules from January 2019.

 

How will these changes impact you?

Firstly, you will need to establish what type of firm the FCA will classify your business as – this will determine how much preparation work is required. The FCA will be writing to all businesses advising on which category of firm they believe you are in due course, but you will fall into one of the 3 below categories:

  • Limited scope – If you hold limited permissions with the FCA then you will be a limited scope firm
  • Core firm – All other businesses that hold full permission will be a Core firm.
  • Enhanced firm – In some cases, if you meet specific criteria stipulated by the FCA, you could be classed as an enhanced firm but this is highly unlikely.

Once you know which type of firm you are, there are 3 separate sections to SM&CR that you need to take steps to address.

 

  1. The Senior Managers Regime

The Senior Managers Regime will see the creation of Senior Manager Functions (SMFs) to replace the existing controlled functions under the Approved Persons Regime. The purpose is to make more key individuals accountable.

It will apply to your directors but will also apply to other senior staff such as heads of departments or senior managers in certain key business areas, such as sales, customer service, finance or HR.  All SMFs must be approved by the FCA to carry out their duties.

The FCA will automatically transfer your directors over from their controlled functions under the old Approved Persons Regime to the relevant SMFs. However, you will need to notify them about any other individuals who will need to hold SMFs.

Those holding SMFs will have a duty of responsibility. This means if a rule breach occurs in their business area then they will be held accountable.  It also means those holding SMFs must be fit and proper to do their jobs.

In order to assess and evidence this, the FCA has stipulated that you must do the following.

  • Annually assess (and document) an individual’s fitness and propriety, taking in to account their integrity and reputation, competency to do the job, their financial soundness and their criminal record (if a holder of a SMF has a criminal record you must declare this to the FCA).
  • When hiring new staff who will hold a SMF, you must obtain ‘regulatory references’ from previous employers. The FCA stipulate what is required in these references.
  • Issue each senior manager with a Statement of Responsibility. This is a document which shows what the senior manager is responsible and accountable for and you will be required to provide this to the FCA.
  • All senior managers have a duty of responsibility which they will need to be aware of – if there is a rule breach that they did not take reasonable steps to prevent or stop then the FCA can hold them accountable.
  • Senior managers must be assigned with prescribed responsibilities which are stipulated by the FCA, however you must decide which senior manager is best placed to hold each prescribed responsibility (limited scope firms do not need to do this).
  • If you are an enhanced firm then you will also have to create comprehensive handover procedures and responsibilities maps.

Failure to identify and apply to the FCA for approval of senior managers to hold SMFs could result in the FCA taking action against you, including fines or revoking your permissions to carry out the regulated activity of credit broking (offering finance to your customers).

CHECKLIST

þ ACTION: Create a list of all your proposed SMF holders and ensure you hold the relevant information to demonstrate that they are fit and proper to conduct their duties.

þ ACTION: Notify the FCA about any additional SMF holders (excluding those directors who will be moved over automatically by the FCA).

þ ACTION: Annually assess everyone responsible for Senior Manager Functions & document your findings – as per list above.

þ ACTION: Ensure SMF holders are suitably trained on the Conduct Rules (section 3) and you have processes in place to ensure the rules are being adhered to.

 

  1. The Certification Regime

The Certification Regime is designed to cover staff who aren’t performing roles and functions of a senior management level but can still have a significant impact on customers or your business. This could include your sales staff if they are discussing finance with customers and have the potential to mislead or mis-sell.

Smaller businesses may not have any certification staff but it is up to you to decide who in your business falls under the certification regime.

Certification regime staff do not need to be approved by the FCA, however you are still required to annually assess if they are fit and proper to do their job and issue them with a certificate to show this. You must consider the individual’s qualifications, training, and competence when doing this.

CHECKLIST

þ ACTION: Identify those members of staff who could fall under the Certification Regime.

þ ACTION: Annually assess the identified staff and document your findings – include any qualifications they hold, the training they’ve had, and competence levels. Issue them with a certificate to evidence this.

 

  1. Conduct Rules

Two new sets of conduct rules will be introduced by the FCA as part of SM&CR. The first set of rules apply to all of your staff (except ancillary staff such as cleaners) and they echo the FCA’s principles of business:

  1. You must act with integrity;
  2. You must act with due care, skill and diligence;
  3. You must be open with the FCA, PRA and other regulators;
  4. You must pay due regards to the interests of customers and treat them fairly; and
  5. You must observe proper standards of market conduct.

The second set of conduct rules are specifically for the holders of Senior Manager Functions (SMFs).

  1. You must take reasonable steps to ensure that the business of the firm for which you are responsible is controlled effectively.
  2. You must take reasonable steps to ensure that the business of the firm for which you are responsible complies with the relevant standards and requirements of the regulatory system.
  3. You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively.
  4. You must disclose appropriately any information which the FCA or PRA would reasonably expect notice.

The FCA must be notified of all breaches of conduct rules.

CHECKLIST

þ ACTION: Ensure all relevant employees have been trained on the new conduct rules.

þ ACTION: Ensure you have a process in place to notify the FCA in the event that the conduct rules are breached.

 

What should you do now?

  1. Share this newsletter article with the relevant individuals in your business who will need to be aware of the upcoming regulatory changes.
  2. Review the FCA’s guidance on SM&CR which you can find here https://www.fca.org.uk/publication/policy/guide-for-fca-solo-regulated-firms.pdf
  3. Although implementation of the new rules is 12 months away, you should start considering who your senior managers and certification regime staff are going to be and what their responsibilities are.
    • Identify who your most senior staff are in each department and what they are responsible for day-to-day.
    • Create statements of responsibilities for your senior managers and assign them with prescribed responsibilities.
    • Pay particular attention to areas such as sales, customer service, finance, and HR.
  4. You should also think about how you will need to amend your HR and recruitment processes to ensure that you are conducting the necessary fit and proper persons checks on an annual basis, obtaining regulatory references prior to employment, and providing staff with certificates.
  5. Go through the checklists in this article and create an action plan.

 

How CCS can help you…

We’re committed to providing you with the necessary support and guidance you need during the next 12 months to ensure that you are ready to transition over to the SM&CR.  Our Compliance Manager is on hand to answer any questions you have, we will also be producing guidance documents, helpful templates, and training material.  Make sure you read future editions of our internal newsletter as we will be providing further updates.

February 5, 2019 - Consumer Credit Regulation FCA



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